Water pact on hold; Alon, city still negotiating

April 11, 2012

That's the message City Finance Director Peggy Walker delivered to the Big Spring City Council Tuesday night regarding negotiations between the municipality and Alon USA to amend their raw water agreement. Consideration of a possible agreement was tabled for the second time in the past two weeks.

According to Walker, negotiations had been expected to be wrapped up in time for an agreement to be presented to the council Tuesday evening, however, scheduling conflicts and failure to reach a common ground on the issue made it necessary to skip the matter â€” which was also tabled during the March 27 meeting â€” once again.

â€śWe had really hoped to have the negotiations finalized by tonight. However, we've had some scheduling conflicts in setting up some meetings and everyone is so busy with other things. We did talk to Jimmy Crosby (refinery manager) today and there are still some issues, not necessarily with the amount of money Alon will be paying for water, but with how the rates will be structured. He wants to have some input when it comes to his production costs and if we have anything that is a flat fee or fixed charge, of course that impacts their production costs, yet it's not something they can control.

â€śWe're still looking at various opportunities and ways we can structure this and we may go with a partial base-rate, a partial fixed-rate on some delivery and we're also looking at a better way to approach them paying the city the amount of money we feel is fair. We're also considering going back and looking at their industrial agreement. It's not due to be renewed at this point, however, I think they might be willing to take that back to the council and do an amendment on that so it doesn't effect their production cost, which basically goes into their fixed operating cost.â€ť

Walker said officials with Alon aren't happy with the way fixed rates could impact their production costs, making it difficult for the two entities to come to an agreement.

â€śCurrently Alon uses, on average, between 20 percent to 25 percent of the water the city purchases,â€ť Walker said. â€śThe city pays a little more than $300,000 a month â€” well more than $3 million a year â€” before we even buy the first gallon of water from the Colorado River Municipal Water District. That's the fixed or base charge the city has to pay. So, if Alon is using between 20 to 25 percent of the total water, they are paying 20 to 25 percent of that fixed charge.

â€śThe way they (Alon USA) would really prefer the rates be structured is to build the rates that include the fixed charge, but you don't isolate it. You don't say you're going to pay 20 percent â€” or even 25 percent â€” at a minimum of the fixed charge. They really don't like that. So, that's what we're looking at now, if there's a way to build a rate that minimizes the city's rate if Alon begins using less water, yet generates the revenue they should be paying.â€ť

Once completed, the agreement could effect a lot more than the price Alon USA pays for water, according to city officials.

Walker said Alon officials have announced plans to begin subsidizing a portion of the water it buys from the city of Big Spring with water from a number of wells it plans to construct.

The city of Big Spring â€” along with numerous other cities in drought-stricken West Texas â€” has been faced with drastic cuts in water deliveries from CRMWD, forcing the municipality to enact water-use restrictions as part of its Drought Contingency Plan, which is currently in Stage 3.

While the reduction in water consumption may seem like a good idea with drought-stricken CRMWD already struggling to meet water demands throughout the Permian Basin, the reduction in Alon's water bill could spell a hefty increase in the city's other users.

â€śOur rates are based on prior usage. So, the $300,000 the city pays each month right now is based on how much water we've used in the past, which included the 20 to 25 percent Alon was using,â€ť Walker said. â€śIf Alon decreases their water usage, the city of Big Spring, overall, would be using less water, which is a good thing. Unfortunately, the $300,000 fixed charge we pay each month doesn't decrease, even if we use less water. Alon would be paying less â€” possibly a lot less â€” but the city still has to pay that fixed charge, which could mean a rate increase for customers.â€ť

According to Walker, any rate hike felt due to a decrease in water usage by Alon USA would likely be temporary, however, until the water district adjusted the rates it charges the municipality, the city will be stuck with the bill.

â€śThere's no recourse in that situation because rates are set once a year. If we had a drastic reduction in our water consumption â€” say Alon went from using 25 percent to using 5 percent, a 20 percent overall reduction in water use â€” the water district would look at it the following year and our rates could go down progressively in the future. However, there's at least a one-year lag period. That's why we're working so hard to build something that's fair to both parties, is equitable, covers our risk and provides the revenue Alon should be paying.â€ť